The once almight dollar

The dollar is being propped up, believe it or not, by the Chinese yuan. Although the Chinese run a positive balance of trade with virtually everyone on the planet, they have currency that, due to its close connection with the greenback, is actually depreciating in relation to the really strong currencies like the Euro and the Canadian petro loonie.

The artificial tie between the greenback and the yuan has been pulling the yuan down and eventually the connection will be broken. When it does, the dollar will drop further. Probably a lot further. We have no option except to import oil at whatever the producers choose to charge and we have eliminated so much manufacturing capacity that we have little choice except to buy Chinese. American commodity farmers and Boeing will benefit, but it will take an enormous growth in those areas to offset the increasingly expensive imports.

There will be serious inflation. A central bank can prevent inflation through monetary policy only if there is something close to foreign exchange equilibrium, but that is lacking. The Fed cannot lower interest rates without sinking the dollar completely. Inflation will result from import substitution, not cost-push.